Journal on Policy and Complex Systems
Table 2 . Multiplicative interdependent institutions . A numerical illustration is provided , where a high score is 0.9 , a medium score is 0.6 and a low score is 0.1
Ease of entry ( wrt entry costs ) |
Absence of corruption |
|
|
|
Efficiency of credit markets |
Efficiency of labor market |
Business performance |
x 1
x 2
x 3
x 4
HI HI HI HI successful 0.9 0.9 0.9 0.9 0.6561
LO LO LO LO very difficult 0.1 0.1 0.1 0.1 0.0001
LO HI HI HI difficult 0.1 0.9 0.9 0.9 0.0729
HI LO HI HI difficult 0.9 0.1 0.9 0.9 0.0729
HI HI LO HI difficult 0.9 0.9 0.1 0.9 0.0729
HI HI HI LO difficult 0.9 0.9 0.9 0.1 0.0729
MID MID MID MID feasible 0.6 0.6 0.6 0.6 0.1296
The economy characterized by unequal institutions would do better to “ heed its weakest link ”, because the marginal benefits of improving the weakest institution are larger . The total economic output can be expressed as the product of the constituent institutions : . The marginal effects of improving institution i can be expressed as
In other words , the marginal contribution of one institution is determined precisely as the product of all of the other institutions . This highlights the extreme degree of interdependence in this model .
These marginal effects are calculated and reported in Table 3 . In the case of unequal institutions , we see that the marginal benefits of improving the weakest institution ( 0.729 ) are much larger than those of improving the other institutions ( 0.081 ).
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